Thursday, May 17, 2007
Former investment banker Bert Fingerhut entered a guilty plea and settled SEC civil charges related to a scheme to purchase shares in initial public offerings of mutual savings bank stock when they converted to publicly-traded companies. A mutual bank is owned by its depositors, and many of these banks have converted into corporations with shares traded on a securities exchange in order to tap the capital markets for funding. When the bank converts, it is required to offer shares to its owners -- the depositors -- at a price that is often a substantial discount to the subsequent market price. Fingerhut's scheme involved opening accounts in 65 different mutual savings banks in his name and those of his nominees in order to get an in on buying the shares at a discount. Because these conversions are heavily oversubscribed, Fingerhut got far more shares than he otherwise would have been eligible to purchase, and realized a profit of over $12 million on the trades. Fingerhut and one of his nominees entered a guilty plea to one count of conspiracy to commit securities fraud, and Fingerhut and three nominees settled the SEC's civil action. The SEC Litigation Release (here) describes the scheme:
The defendants deliberately evaded these and other applicable banking regulations and offering terms contained in the converting Bank's prospectuses that imposed maximum purchase limits and prohibited the transfer of depositor's purchase rights. These priority purchase rights allow the depositors to purchase up to a certain number of shares at a relatively low price, and shares are allocated among depositors according to various criteria if an offering is oversubscribed. To ensure that only depositors benefit from their priority purchase rights, federal and state banking regulations prohibit depositors from transferring ownership of their purchase rights or from entering into any agreement regarding the sale or transfer of shares purchased in the offering.
Bert Fingerhut funded the opening of accounts in his own name and the names of his nominees at mutual savings banks throughout the country. When any of the banks undertook a conversion, he secretly funded his nominee's stock purchases, controlled the sale of his nominee's shares and retained most of the trading profits. He also had the nominees submit stock order forms in which they falsely certified to the banks that they were purchasing the stock for their own account and had no agreement to transfer the shares or the proceeds of their sale. Bert Fingerhut caused his nominees to make these material misrepresentations in 65 public stock offerings by banks. The 65 offerings were oversubscribed, and the defendant's misconduct therefore limited the amount of stock available to legitimate depositors, some of whom received less stock than they requested or were completely shut out. Bert Fingerhut and his nominees made over $12 million from the scheme at the expense of other depositors.
A press release (here) issued by the U.S. Attorney's Office for the District of New Jersey describes the criminal charges, and Fingerhut faces a likely sentence of approximately five years. (ph)